The process by which one chooses the most favorable domicile for a captive
often involves geography, ease of travel, existence of support services, political
tranquility, entertainment options, and the preferences of regulators. This
process can be involved, detailed, and analytical. Or it can be driven by the
CEO's favorite vacation spot. Any of these reasons are legitimate and usually
result in a favorable outcome.

New Considerations

In recent months it has become more necessary to add some new considerations
to the list. The matter of regulatory concern in the past has focused on the
attitudes of the regulators in regard to certain lines of business and certain
classes of business. Some regulators don't like risks with wheels on them. Some
don't like anything that someone could construe as personal lines. Some don't
care to become involved in anything with automobile dealers or warranties. While
these traits may be frustrating to some captive owners, they are legitimate
to the regulators and known to the captive practitioners. They are predictable,
and they so can be managed.

Lack of Qualified Personnel

Now there seems to be additional regulatory concerns. The first is the thinning
ranks of qualified captive regulators. With the retirements of imminent persons
such as Len Crouse in Vermont and Mary Lou Gallagos in Cayman, there are few
seasoned, strong voiced regulators left to speak up in defense of the unique
regulatory requirements of captives. And it is clear that captives as proposed
in the United States still need thoughtful, vigorous defenses against regulatory
bodies and quasi-regulatory bodies that neither understand captives and their
purposes/value nor care if captives continue to supply jobs and tax revenues.

There are open jobs that are not being filled, and there are few eminently
qualified candidates willing to engage in the field for remuneration which is
not attractive. Coupled with budgetary restraints faced by some domiciles, if
not all, the real risk is that these important posts will either go unfilled
or be filled by unqualified candidates. This will work to the detriment of both
the domicile and the industry. A warm body with credentials is not the same
as a person who appreciates the value of captives and will work hard to preserve
their role in risk transfer.

NAIC Accreditation

The second new concern, which may be more serious and long lasting, is the
approach to handling the pronouncements of the trade association for insurance
regulators, the National Association of Insurance Commissioners (NAIC). This
association has no official powers or rights. It is voluntary in theory. It
holds to its considerable non-official policing powers through its process of
accrediting a state as to the state's qualifications and processes in regard
to the NAIC's self-promulgated rules.

Accreditation by the NAIC means that an entity doing business with an insurer
regulated elsewhere can theoretically rely on the home state's regulation of
the entity. Withholding accreditation can theoretically have quite serious consequences
if an entity doing multistate business must submit to individual regulation
on a state-by-state basis. Accreditation in this sense is logical, helpful,
and probably necessary.

The process for accreditation involves a thorough examination which will
result in recommendations for change and improvement, to be paid for by the
examined state's citizens. This examination occurs in each state, on a rotating
basis, every 3 years.

The practical consequence of this process, which is now being seen in the
captive world, is that state departments of insurance that are "up for exam"
become completely absorbed in preparing themselves, their staff, and files to
"pass the exams." So, if a state that is being considered as a domicile for
your captive is "up for exam" in the next 12 months and your application is
a bit on the edge, consider another domicile—purely because of the fear of the
NAIC triennial exam.

Likewise, if the domicile that hosts your captive is being examined and begins
to demonstrate some unfriendly attitudes in hopes that your captive will disappear,
you may have to consider a move. In more tranquil times, redomiciling a captive
is a regulated process with certain steps and information to be provided, reviewed,
and approved. During an exam, this process may be smoothed in order to get you
off the regulator's books and keep the NAIC happy.

Working Around the Triennial Exam

All of this brings us to the new considerations for choosing a domicile:
"When is the triennial NAIC exam?"

This consideration may surprise or amuse some captive professionals, but
it is a real and growing aspect of our world. If your captive is one that is
encountering regulatory rigidity, and the responses to your inquiries have not
been satisfactory, you or your captive adviser should check the NAIC triennial
exam calendar. If your domicile is on the list for the near future, you may
wish to meet with your regulator and ask if the files for your captive meet
with their approval and that all aspects are in good order. You might consider
offering any assistance in working with the regulatory staff to bring your files
up to NAIC requirements.

Conclusion

While reshaping your captive to the satisfaction of the NAIC, a group supported
by the traditional market insurers, may be vexing, your regulator likely will
appreciate the cooperative, helpful attitude. You may wish to fight back against
some requirements, but in today's resource-poor environment for captive regulators,
your better target is legislators rather than your regulator.

Redomiciling will arise as an option and it may indeed by a wise choice,
but bear in mind that the next domicile will also soon suffer the triennial
exam and likely display some of the same rigidity. This raises the obvious question,
"Does the NAIC apply to offshore captives?" I believe the answer is "No."

As always, it benefits your captive to know your regulators well and to keep
up to date on matters in your domicile affecting your captive—because it is
your money at stake.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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